GIFT  OF 


War  Taxation 


Some  Comments  and  Letters 


OTTO  H.  KAHN 


OF  THE 
UNIVEKS1TY 

.o       OF 


1917 


With     the     Compliments     of 


OTTO  H.  KAHN 

52  William  Street 
New  York 


War   Taxation 


Some    Comments    and  Letters 


OTTO  H.  KAHN 


1917 


War  Taxation 


Contents 
Some  Comments Pages  7  to  42 

Letters 
I 

THE  INCOME  TAX Pages  43  to  60 

II 

RETURN  UPON  TAXABLE  AND 
TAX-EXEMPT  SECURITIES  .  .  .  Pages  61  to  70 


363413 


War  Taxation 

1 


The  recent  publication  of  a  little  pamphlet 
entitled  "Some  Comments  on  War  Taxation" 
elicited  numerous  interesting  comments  .by  the 
readers.  The  points  to  which  these  comments 
mainly  related  were  the  statements  contained  in 
the  pamphlet  that: 

First.  If  our  neighbor  Canada  continues  her 
present  policy  of  not  taxing  incomes,  or  if  she 
imposes  only  a  moderate  tax  while  rates  of  income 
taxation  in  America  are  fixed  at  oppressively  and 
unnecessarily  high  rates,  there  can  be  little  ques- 
tion that  the  ultimate  result  will  be  an  outflow  of 
capital  to  Canada,  and  that  men  of  enterprise 
will  seek  that  country. 

Second.  Moneyed  men  not  having  their  capital 
engaged  in  active  business,  if  they  are  so  consti- 
tuted that  their  consciences  permit  them  to  evade 
their  share  of  monetary  sacrifice,  can  put. their 
funds  into  tax-exempt  securities. 


In  reference  to  the  foregoing  points,  I  have 
written  two  letters  in  answer  to  correspondents. 
vThese  letters  contain  an  elaboration  of  certain 
arguments  and  viewpoints  set  forth  in  the  original 
.article  on  War  Taxation  and  also  refer  to  some 
additional  phases  of  the  subject.  Those  who  have 
done  me  the  honor  of  perusing  that  article  may 
possibly  be  interested  in*reading  these  letters. 

In  order  that  they  may  be  presented  as  a  part 
of  the  argument  as  a  whole,  the  original  article 
with  a  few  additions  and  slight  revisions  is  printed 
in  the  first  part  of  this  pamphlet,  followed  by  the 
letters.  ' 

0.  H.  K. 

52  William  Street, 
New  York,  July  5,  1917. 


SOME    COMMENTS   ON 
WAR    TAXATION 


This  is  a  reprint,  somewhat  amplified, 
of  an  article  printed  recently  in  the 
New  York  Times.  The  original  article 
was  written  before  the  recommendations 
of  the  Ways  and  Means  Committee  of  the 
House  of  Representatives  were  reported 


IN  A  TIME  of  patriotic  exaltation  and 
of  universal  obligation  and  readiness 
to  make  great  sacrifices  to  bring  a 
most  just  and  righteous  war  to  a  success- 
ful conclusion,  the  voice  of  sober  argument 
and  matter  of  fact  considerations  is  apt  to 
grate  upon  the  ears  of  the  people. 

That  voice  is  all  the  less  likely  to  be 
popular  when  the  arguments  it  puts  forth 
may  easily  lend  themselves  to  the  in- 
terpretation of  being  actuated  by  solici- 
tous care  for  selfish  interests. 


SOME        COMMENTS 

I  am  fully  aware  that  by  publishing  the 
following  observations  I  am  exposing  my- 
self to  that  interpretation  and  to  criticism 
of,  and  attack  upon,  my  motives. 

Yet,  seeing  that  certain  measures  now 
under  consideration  threaten  to  take 
shape  in  a  way  which,  from  my  practical 
business  experience  and  after  mature 
deliberation,  I  am  bound  to  regard  as 
faulty  and  as  indeed  harmful  to  the 
country,  I  believe  it  to  be  right  and  proper 
to  contribute  my  views  to  the  public  dis- 
cussion of  the  subject,  for  whatever  they 
may  be  worth. 

I  can  only  hope,  then,  that  in  what  I 
am  going  to  say  I  shall  be  given  credit  for 
endeavoring  to  speak  conscientiously  and 
to  the  best  of  my  knowledge  and  judg- 
ment from  the  point  of  view  of  the  wel- 
fare of  the  entire  country  and  not  of  the 
welfare  merely  of  the  well-to-do. 

I  shall  address  myself  to  the  practical 


ON       WAR       TAXATION 

aspect  and  to  a  few  phases  only  of  the 
question  and  shall  not  attempt  to  enter 
into  the  economic  theories  and  the  broader 
and  deeper  considerations  involved. 

I  shall  assume  in  my  argument  that 
what  Congress  is  seeking  to  accomplish  is 
to  impose  taxes  justly,  effectively  and 
scientifically  with  the  desire  to  disturb  the 
country's  trade  and  commerce  as  little  as 
possible  and  to  avoid  as  much  as  may  be 
the  evils  of  financial  dislocation. 

I  shall  take  it  for  granted  that  at  a 
time  when  more  than  ever  the  unity  of  the 
country  should  be  emphasized,  sectional 
selfishness  will  find  no  place  in  the  taxa- 
tion program,  and  that,  should  it  be  at- 
tempted nevertheless,  the  congressional 
delegations  of  the  States  which  would  be 
unjustly  affected,  would  resist,  regardless 
of  party  affiliations,  harmful  discrimina- 
tion against  their  constituents  and  their 
States. 


SOME        COMMENTS 

I  shall  assume  that  it  is  not  the  purpose 
and  intent  of  Congress,  under  the  guise  of 
the  necessities  of  the  war  situation,  to 
embrace  the  doctrines  of  Socialism. 

Our  present  economic  system,  our 
present  method  of  wealth  distribution 
may  or  may  not  stand  in  need  of  change; 
the  fact  remains  that  Congress  has  no 
mandate  to  effect  a  fundamental  change. 

The  consequence  of  such  a  change 
would  be  so  immensely  far-reaching  that 
no  government  has  the  right  to  sanction 
steps  to  bring  it  about  until  the  subject 
has  been  fully  discussed  before  the  peo- 
ple in  all  its  bearings  and  the  people  have 
pronounced  judgment  through  a  Presi- 
dential or  other  election. 


10 


ON       WAR       TAXATION 

I  will  first  state  what  in  my  opinion 
ought  not  to  be  done: 


I  take  it  that  not  many  words  need  be 
used  to  expose  the  fallacy  of  the  argu- 
ment, heard  even  in  the  Halls  of  Congress: 
"If  men  are  to  be  conscripted,  wealth  also 
must  be  conscripted." 

Men  will  be  conscripted  to  the  extent  that 
it  is  wise  and  just  and  needful  So,  and  no 
other,  should  wealth  and  the  country's  re- 
sources in  general  be  conscripted. 

And,  are  not  the  children  of  the  well-to- 
do  conscripted  equally  with  the  children 
of  the  poor? 

Indeed,  the  proportion  of  the  sons  of 
the  well-to-do  on  the  actual  fighting  line 
is  bound  to  be  a  predominating  one,  be- 
cause vast  numbers  of  wage  workers  in 
11 


SOME        COMMENTS 

the  industries  and  on  the  farms  will 
necessarily  have  to  be  retained  at  their 
accustomed  vocations  in  order  to  main- 
tain the  output  of  our  factories  and  farms. 
Have  the  children  of  the  well-to-do 
been  backward  in  volunteering?  Were 
they  not,  on  the  contrary,  amongst  the 
very  first  to  offer  to  serve  and  to  fight? 


12 


ON       WAR       TAXATION 


ii 


There  appears  to  prevail  amongst  not  a 
few  people  the  strange  delusion  that  Amer- 
icas entrance  into  the  war  was  fomented  by 
moneyed  men,  in  part,  at  least,  from  the 
motive  and  for  the  purpose  of  gain. 

Were  there  any  such  men,  no  public 
condemnation  of  them  could  be  too  severe,  no 
punishment  would  be  adequate.  I  am 
absolutely  certain  that  no  such  hideous  and 
dastardly  calculation  found  lodgment  in  the 
brain  of  any  American,  rich  or  poor. 

Moreover,  is  it  not  perfectly  manifest 
that  any  rich  man  in  his  senses  must  have 
known  that  his  selfish  interest  was  best 
promoted  by  the  continuance  of  the  con- 
ditions of  the  last  three  years  in  which 
America  furnished  funds  and  supplies  to 

13 


SOME        COMMENTS 

Europe  at  huge  profits,  whilst  our  enter- 
ing the  war  was  bound  to  diminish  those 
profits  very  largely  (indeed,  to  entirely 
eliminate  some  of  them),  to  interfere  with 
business  activity  in  many  lines  and  to 
compel  the  imposition  of  heavy  taxes  on 
wealth? 

It  is  to  the  credit  of  our  rich  men  that, 
though  fully  realizing  the  extent  of  the 
monetary  loss  and  sacrifices  which  war 
between  this  country  and  Germany  must 
necessarily  bring  to  them,  there  were  but 
very  few  of  them  who  supported  the 
Peace-at-any-Price  Party  or  favored  the 
avoidance  of  America  entering  into  the 
war  when  it  had  become  plain  that  our 
participation  in  that  war  could  not  be 
avoided  with  honor  and  with  due  regard 
for  our  duty  to  our  own  country,  or  to  the 
cause  of  right  and  liberty  throughout  the 
world. 

Yet,  somehow,  the  pacifists  seem  to 

14 


ON       WAR       TAXATION 

have    singled    out   the   rich    as   mainly 
responsible  for  the  war. 

It  may  be  due,  consciously  or  uncon- 
sciously, to  a  resulting  feeling  of  resent- 
ment that  the  proposal  to  confiscate  dur- 
ing the  war  all  incomes  beyond  a  certain 
figure  is  actively  promoted  by  leading 
pacifists — a  proposal  based  upon  ignor- 
ance of,  or  disregard  for,  the  laws  of 
economics,  teachings  of  history  and  prac- 
tical considerations. 

If  any  such  scheme  were  to  be  adopted, 
the  consequences  to  the  country  at  large 
would  be  far  more  serious  than  to  the 
victims  of  the  proposed  action. 

If  such  a  measure  of  outright  confisca- 
tion were  seriously  apprehended,  at  a 
time  moreover  and  under  conditions 
which  are  far  as  yet  from  calling  for  ex- 
treme measures,  capital  would  cease  to 
flow  in  its  accustomed  currents  and  some 

15 


SOME        COMMENTS 

of  it  would  seek  other  channels  legiti- 
mately open  to  it. 

It  would  certainly  cease  flowing  into 
constructive  use  and  would  instead  con- 
fine itself,  to  an  extent  at  least,  to  muni- 
cipal, state  and  federal  tax-exempt 
securities.  Enterprise  would  be  seriously 
hampered  and  in  some  respects  brought  to 
a  standstill  entirely. 

Many  thousands  of  workmen  would  be 
thrown  out  of  employment.  Many  busi- 
nesses and  shops  would  close. 

There  would  ensue,  as  a  natural  con- 
sequence and  without  any  conscious 
determination,  a  nation-wide  strike  of 
constructive  activity  and  enterprise  in 
commerce  and  finance,  because  men  will 
not  look  upon  it  as  a  * 'square  deal"  if  they 
are  to  take  all  the  risk  and  responsibility, 
all  the  hard  work  and  ceaseless  strain  and 
care  of  business  effort,  whilst  the  Govern- 
ment would  needlessly  take  from  them  an 

16 


ON       WAR       TAXATION 

unduly  large  share  of  the  fruit  of  their 
labor,  let  alone  all  of  it  except  an  arbi- 
trarily fixed  sum. 

I  say  "needlessly"  because,  were  it 
really  needed,  business  men  would  willingly 
sacrifice  their  entire  income  for  the  country's 
cause. 

They  would  work  for  patriotism,  with- 
out any  recompense  whatever,  just  as 
hard  and  harder  than  they  do  for  gain 
or  for  ambition,  if  the  occasion  required  it. 

But,  of  course,  everyone  knows  that 
nothing  remotely  approaching  such  dras- 
tic taxation  is  required  in  this  country  at 
this  time. 

It  is  absolutely  right  to  proclaim 
and  to  enforce  by  legislation  that  no 
man,  as  far  as  it  is  possible  to  prevent 
it,  shall  make  money  out  of  a  war  in 
which  his  country  is  engaged,  but 
there  is  all  the  difference  in  the  world 

17 


SOME        COMMENTS 

between  that  just  and  moral  doctrine 
and  between  tbe  doctrine  that  no 
man  shall  be  permitted  to  have  more 
than  an  arbitrarily  fixed  income 
during  a  war. 

If  $100,000  or  any  fixed  sum  is  the  limit 
of  what  may  be  permissible  income  during 
war  time,  why  not  by  and  by  a  lesser  sum? 

If  the  principle  is  once  admitted,  where 
will  its  application  stop,  even  in  time  of 
peace? 

Why  is  not  the  proposed  plan,  or  any- 
thing in  the  nature  of  that  plan,  simply 
license  for  the  materially  unsuccessful  to 
despoil  the  materially  successful? 

History  shows  more  than  one  instance 
where  this  road  inevitably  leads  to  when 
once  entered  upon. 

And  who  are  our  successful  men?  The 
vast  majority  of  them  are  self-made  men 
who  started  at  the  bottom  of  the  ladder. 

18 


ON       WAR       TAXATION 

It  is  trite  to  say  that  inequality  of  en- 
dowment and  therefore  inequality  of 
results  in  human  beings,  as  well  as  in  in- 
animate things,  is  a  law  of  nature.  The 
capacity  for  creating,  organizing,  leading, 
etc.,  in  short,  the  possession  of  those 
qualities  of  brain  and  disposition  which 
beget  success,  is  rare. 

It  is  in  the  interest  of  the  community, 
whilst  carefully  guarding  and  fostering 
the  rights,  the  opportunities  and  the  well- 
being  of  all  of  its  members,  to  give  liberal 
incentives  to  men  possessing  those  gifts  to 
put  them  to  active  and  intensive  use.  It 
is  hardly  open  to  doubt  that,  generally 
speaking,  the  work  of  able  men,  engaged 
in  serious  and  legitimate  business  (I  am 
not  speaking  of  gamblers  and  parasites), 
whilst  naturally  benefiting  them,  benefits 
the  community  a  great  deal  more. 

The  income  of  hospitals,  orphan 
asylums,  institutions  of  learning  and  of 

19 


SOME        COMMENTS 

art  and  many  other  altruistic  enterprises 
depends  largely  upon  the  voluntary  taxa- 
tion, aggregating  a  great  many  millions 
annually,  to  which  those  men  in  America 
who  have  attained  financial  success  have 
always  willingly  submitted  themselves— 
more  so,  probably  than  in  any  other 
country. 

Who  is  to  take  care  of  all  of  those  in- 
stitutions if  extreme  taxation  compels  the 
rich  to  cease  their  contributions? 


20 


ON        WAR       TAXATION 


in 

The  arguments  above  set  forth  apply 
likewise,  though  naturally  not  quite  in 
the  same  degree,  to  the  proposal  of  levy- 
ing an  income  tax  rising  to  an  excessively 
high  level,  as,  for  instance,  the  suggested 
tax  of  fifty  per  cent,  on  incomes  over 
$500,000. 

There,  again,  the  test  should  be  whether 
so  radical  a  tax  is  wise  and  required  by  the 
necessities  of  the  country. 

The  nations  in  Europe  have  been  fight- 
ing for  nearly  three  years  and  have  been 
under  an  infinitely  greater  financial  strain 
than  our  country  is  or  will  be,  yet  none  of 
these  nations  have  resorted  to  extreme 
taxation  of  income. 

Even  in  Great  Britain,  whose  financial 
burden  is  the  heaviest  of  all,  whose  debt 
21 


SOME        COMMENTS 

is  many  times  the  total  of  ours  and  who 
has  loaned  about  $5,000,000,000  to  her 
Allies,  the  highest  income  tax  rate,  the 
maximum  percentage  in  the  graduated 
scale  of  taxation,  is  to-day  no  more  than 
approximately  forty  per  cent. 

In  the  last  budget,  introduced  a  couple 
of  weeks  ago,  the  British  Chancellor  of  the 
Exchequer  declined,  so  I  am  informed,  to 
consider  an  increase  in  the  income  tax 
rate,  because  of  the  damaging  effect  which 
such  increase  would  be  apt  to  have  on  the 
country's  business  and  prosperity. 

In  France  and  Germany  the  burden 
laid  on  incomes  is  much  lower  than  in 
England.  In  Canada  where  war  loans 
have  been  raised  equivalent  on  the  basis 
of  comparative  population  to  what  would 
be  more  than  $10,000,000,000  for  Amer- 
ica, no  Federal  Income  Tax  exists  at  all. 

I  doubt  whether  this  latter  fact  is  gen- 
erally known  in  this  country  and  whether 

22 


ON       WAR       TAXATION 

its  significance  is  receiving  the  measure  of 
serious  consideration  which  it  deserves. 

I  understand  that  it  is  the  deliberate 
policy  of  the  Dominion  Government  to 
endeavor  to  avoid  resort  to  an  income  tax 
in  order  to  attract  capital  to  Canada. 

There  can  be  little  question  that  if  our 
income  taxation  is  fixed  at  unduly  and 
unnecessarily  high  rates,  whilst  Canada 
has  no  or  only  a  very  moderate  income 
tax,  men  of  enterprise  will  seek  that 
country  and  there  will  be  a  large  outflow 
to  it  of  capital  in  course  of  time — a  devel- 
opment which  cannot  be  without  effect 
upon  our  own  prosperity,  resources  and 
economic  power. 

The  financial  dislocation,  the  dis- 
couragement and  the  apprehension  caused 
by  unduly  heavy  taxation  of  incomes  will 
not  only  act  as  a  drag  on  enterprise  and 
constructive  activity,  but  will  make  it 
exceedingly  difficult,  if  not  impossible,  for 

23 


SOME        COMMENTS 

corporations  to  sell  securities  in  sufficient 
volume  and  thus  to  obtain  adequate 
funds  to  conduct  their  business — espe- 
cially also  as  investors  will  be  fearful 
that  high  rates  of  taxation  once  estab- 
lished will  not  easily  be  reduced  to  normal 
levels,  even  when  the  present  emergency 
is  passed. 

Extravagance,  log-rolling,  the  unwise 
and  inefficient  expenditure  of  money  by 
governmental  bodies  are  amongst  the  be- 
setting sins  of  democracy.  The  formula 
once  found,  the  machinery  once  employed 
for  the  raising  of  huge  revenues,  are  apt 
to  make  the  way  of  wasteful  govern- 
mental spending  all  too  temptingly  easy. 

It  must  not  be  forgotten  that  taxation 
must  necessarily  by  that  much  diminish 
the  surplus  income  fund  of  the  individual 
and  that  both  theoretically  and  actually 
the  spending  of  money  by  the  govern- 
ment cannot  and  does  not  have  the  same 
24 


ON       WAR       TAXATION 

effect  upon  the  country's  prosperity  and 
enterprise  as  productive  use  of  his  surplus 
funds  by  the  individual. 

The  sentimental,  and  thereby  the  actual, 
effect  of  extreme  taxation  will  not  be 
confined  to  the  relatively  small  number  of 
people  in  possession  of  very  large  incomes. 
The  disturbance  and  fear  caused  by  the 
contemplation  of  an  excessively  high  ratio 
of  taxation,  even  when  applied  to  a  rela- 
tively few,  is  bound  to  spread  to  those  also 
of  more  moderate  incomes. 

Capital  is  proverbially  timid.  It  will 
not  take  risks,  except  in  the  expectation 
of  commensurate  reward,  and  if  it  sees  the 
danger  of  its  reward  being  unduly  in- 
fringed upon  by  excessively  rigorous 
income  taxation,  it  will  anticipate  that 
menace  by  withdrawing  from  the  field  of 
constructive  investment  to  the  greatest 
extent  possible. 

So  much  is  this  the  case  that  I  incline  to 

25 


SOME        COMMENTS 

the  belief  that  taxation  so  graded  as  to 
result  in  a  maximum  average  of  say  33^ 
per  cent,  would  produce  at  least  as  great  a 
revenue  as  a  maximum  average  of  50 
per  cent. 

It  is  one  of  the  oldest  principles  of 
taxation  that  an  excessive  impost  destroys 
its  own  productivity. 

The  flood  of  securities  which  would  be 
coming  for  sale  in  order  to  escape  extreme 
income  taxation  would  create  a  grave  con- 
dition of  demoralization  in  the  invest- 
ment markets  of  the  country,  with  the 
resulting  inevitable  effect  upon  the 
country's  general  business,  and  upon  its 
capacity  to  absorb  Government  loans. 


26 


ON       WAR       TAXATION 


IV 

The  tax  recently  enacted  by  Congress 
imposing  a  burden  of  8  per  cent,  on  busi- 
ness profits  over  and  above  8  per  cent,  on 
the  capital  employed,  regardless  of 
whether  such  profits  have  any  relation  to 
war  conditions  or  not,  is  unscientific  and 
unsound. 

(Incidentally,  it  is  a  strange  provision  of 
that  law  that  it  applies  only  to  co-partner- 
ships and  corporations,  whilst  an  indi- 
vidual engaged  in  business,  however 
profitable,  is  not  taxed.) 

It  is  unquestionably  right  and  in  ac- 
cordance with  both  good  morals  and  good 
economics,  to  prevent,  as  far  as  possible, 
the  enrichment  of  business  and  business 
men  through  the  calamity  of  war. 

27 


SOME        COMMENTS 

But  the  recently  enacted  so-called 
excess  profit  tax  which  it  is  now  proposed 
to  augment  largely  does  not  accomplish 
that.  It  taxes  not  merely  the  exceptional 
profit,  i.  e.,  the  war  profit.  It  lays  a 
burden  not  on  business  due  to  war,  but  on 
all  business. 

It  does  this  at  a  time  when  it  is  more 
than  ever  necessary  that  energy,  enter- 
prise, efficiency,  the  commercial  and 
financial  brain  and  work-power  of  the 
nation,  be  stimulated  to  their  utmost  in 
order  to  make  good,  as  far  as  possible,  the 
waste  and  destruction  which  go  with 
war. 

Any  scheme  of  taxation  which  imposes 
an  unnecessary  burden  upon  commercial 
enterprise  and  thereby  handicaps  the 
nation  in  its  business  activities — especially 
in  world  competition  with  other  nations- 
is  unsound  and  bound  to  be  gravely  detri- 
mental, both  to  the  business  men  and  still 

28 


ON       WAR       TAXATION 

more  to  the  wage- worker;  in  fact,  to  every 
element  of  the  population. 

It  is  worth  noting  that  England,  the 
conduct  of  whose  finances,  based  upon  the 
experience  of  many  generations  as  the 
leading  financial  power,  has  always  been  a 
model  for  other  nations  to  follow,  has  im- 
posed an  excess  profit  tax  on  business 
during  the  war  merely  to  the  extent  that 
such  profits  are  attributable  to  the  war, 
i.  e.9  to  the  extent  that  they  exceed  the 
profits  of  normal  years. 

In  principle,  direct  taxation  of  business 
activities  should  be  avoided  as  much  as 
possible,  apart  from  a  war  profit  excess 
tax. 

Care  should  be  taken  lest  the  wealthy 
man  least  entitled  to  preferential  con- 
sideration, i.  e.,  he  who  neither  works  nor 
takes  business  risks  or  business  respon- 
sibilities, be  favored  as  against  the  man 
who  puts  his  brains,  his  capacities  and  his 

29 


SOME        COMMENTS 

money  to  constructive  use  in  active  busi- 
ness. 

The  idle  man  possessing  capital,  much 
or  little,  if  he  is  so  constituted  that  his 
conscience  permits  him  to  evade  his 
share  of  monetary  sacrifice,  can  put  his 
money  into  tax-exempt  securities.  The 
man  of  means  who  toils  in  business  or  a 
profession  must  pay  a  heavy  income  tax, 
an  excess  profit  tax,  etc.  To  an  extent 
this  undesirable  differentiation  is  prob- 
ably unavoidable,  but  it  is  neither  fair 
nor  in  the  interest  of  the  community  that 
it  be  accentuated. 


It  seems  to  me  so  manifest  as  to  hardly 
require  argument  that  a  retroactive  in- 
come tax,  such  as  has  been  suggested,  is 
wrong  both  in  morals  and  in  economics. 


30 


ON       WAR       TAXATION 


If  the  foregoing  reasoning  is  correct, 
these  conclusions  would  seem  to  follow: 

1.  There  ought  to  be  a  substantial  and 
progressive  increase  in  the  rate  of  income 
taxation  during  the  war,  together  prob- 
ably with  a  lowering  of  the  existing  limit 
of  income  tax  exemption.  I  believe  that 
in  practice  the  best  result  would  be 
obtained  if  the  rates  of  taxation  were  not 
to  exceed  a  scale  producing  from  maxi- 
mum incomes  an  average  tax  of  33J^  per 
cent.,  at  any  rate  for  the  first  year  of 
the  war. 

A  materially  higher  rate  would  not,  in 
my  opinion,  yield  a  substantially  higher 
aggregate  of  revenue  to  the  Government 
(if  as  high  an  aggregate),  while  at  the 
same  time,  if  only  for  sentimental  reasons, 
and  even  though  only  applied  to  very 
large  incomes,  it  would  be  apt  to  cause 

31 


SOME        COMMENTS 

financial  dislocation  and  retard  business 
activity  and  enterprise. 

It  would  seem  advisable  that  such  por- 
tion of  a  person's  income  as  is  devoted  to 
charitable  and  kindred  purposes  should 
be,  if  not  entirely  free  from  income  tax, 
at  least  subject  to  a  reduced  tax  only,  so 
as  to  counteract  the  tendency  which 
experience  has  shown  to  follow  in  the 
wake  of  heavy  taxation,  of  greatly  dimin- 
ishing charitable  contributions. 

2.  There  ought  to  be  an  excess  profit  tax 
which  might  well  be  at  a  considerably 
higher  rate  than  the  present  8  per  cent.,  or 
even  the  proposed  16  per  cent.,  but  it 
should  only  be  applicable  to  the  extent 
that  business  profits  exceed  the  profits  of 
say  a  certain  average  period  before  the 
war  and  thus  may  justly  be  held  to  be 
attributable  to  war  conditions. 

In  determining  the  basis  for  calculating 

32 


ON       WAR       TAXATION 

excess  profits,  an  offset  which  might  be 
fixed  at  say  10  per  cent,  per  annum,  due 
consideration  being  given  to  the  question 
of  depreciation  and  to  special  circum- 
stances, ought  to  be  allowed  on  all  new 
capital  invested  in  business  since  the 
beginning  of  the  war. 

I  think  for  the  purpose  of  figuring  the 
excess  profit  tax  the  five,  four  or  three 
years  before  America's  entrance  into  the 
war  would  probably  form  the  most 
appropriate  basis.  The  aggregate  indus- 
trial plant  of  this  country,  the  entire 
scale  and  scope  of  our  commerce  and  its 
concomitants,  have  been  so  completely 
modified  in  the  course  of  the  European 
war  that  a  comparison  which  leaves  out 
of  account  the  years  1915  and  1916  does 
not  seem  to  me  to  fit  the  case.  I  believe, 
both  from  the  point  of  view  of  economics 
and  of  public  opinion,  a  tax  of  say  32  per 
cent,  or  even  40  per  cent.,  or  eventually, 

33 


SOME        COMMENTS 

if  needed,  a  still  higher  percentage,  cal- 
culated on  a  reasonably  high  average  of 
earnings  (that  is,  an  average  including 
1916)  is  preferable  to  a  tax  of  16  per  cent, 
or  20  per  cent,  on  an  inordinately  low 
average. 

I  believe  that  as  between  the  proposed 
16  per  cent,  profit  tax  and  an  excess  profit 
tax  on  the  British  model,  at  the  rate  of 
say  twice  that  figure — to  begin  with — the 
general  consensus  of  opinion  would  con- 
sider the  latter  as  much  the  fairer,  much 
the  less  cumbersome  to  handle  and  col- 
lect, and  much  the  less  hampering  upon 
business  activities.  Yet,  statistics  seem 
to  show  that  such  an  excess  profit  tax 
would  bring  in  a  far  larger  return  than  the 
proposed  16  per  cent,  profit  tax.  From 
figures  which  were  shown  to  me  it  would 
appear  that  a  40  per  cent,  tax  on  excess 
profits  over  and  above  the  average 
earnings  for  the  past  three  years  would 

34 


ON       WAR       TAXATION 

yield  for  the  present  year  the  amazing 
total  of  at  least  $800,000,000  (in  addition 
to  the  yield  from  the  corporate  income 
tax  taken  at  the  rate  of  4  per  cent.). 

These  figures  are  based  on  the  assump- 
tion that  the  aggregate  profits  for  1917 
will  approximately  equal  those  of  1916 — 
a  not  unreasonable  assumption  provided 
always  that  unscientific  taxation  or  other 
unwise  measures  do  not  destroy  prosper- 
ity. (As  a  matter  of  fact,  the  profits  for 
the  first  half  of  1917  are  likely  to  exceed 
those  for  the  same  period  of  1916.)  The 
three-year  average  was  selected  on  the 
theory  that  1914  was  an  exceedingly  poor 
business  year,  1915  was  a  year  of  fair 
prosperity  and  in  1916  the  full  effect  of 
our  stupendous  war  business  had  come  to 
raise  profits  to  an  exceedingly  high  level. 

3.  There  are  very  numerous  forms  of 
taxes,  stamp-taxes,  etc.  (such  as,  for 

35 


SOME        COMMENTS 

instance,  a  2  cent  tax  on  checks),  which, 
whilst  they  would  mainly  fall  on  the  well- 
to-do,  would  be  in  no  way  burdensome, 
and  would  produce  a  very  large  aggregate 
of  revenue. 

What  seems  to  me  in  principle  a  very 
sensible  tax,  has  been  suggested,  namely, 
a  tax  on  purchases  (i.  e.,  each  single  pur- 
chase) of  all  kinds  of  merchandise  (ex- 
cepting foodstuffs,  and  probably  raw 
material)  of  one  cent  for  each  dollar  or 
greater  part  thereof,  exempting  single 
purchases  of  less  than  say  five  dollars. 

This  tax,  which  should  be  paid  by  the 
purchaser,  would  produce  a  very  large 
revenue.  It  would  be  borne  mainly  by 
the  well-to-do,  would  be  more  widely  dis- 
tributed than  almost  any  other  form  of 
taxation  and  would  be  felt  but  very  little. 
It  would  be  easily  and  cheaply  collected 
and  would  begin  to  accrue  much  sooner 
than  most  other  taxes. 

36 


ON       WAR       TAXATION 

4.  I  am  not  convinced  that  the  total 
amount  which  needs  to  be  spent  or  which 
as  a  matter  of  fact  can  be  spent  in  the 
course  of  the  year  requires  so  huge  a  sum 
to  be  raised  by  taxation  as  our  legislators 
appear  to  contemplate. 

The  policy  of  raising  a  large  portion  of 
war  expenditures  by  taxation  is  wise  and 
sound.  But  to  be  iconoclastic  in  applying 
that  policy,  to  make  that  portion  so  large 
as  to  chill  the  spirit  and  lame  the  enter- 
prise of  the  country  is  neither  good 
politics  nor  good  economics. 

The  present  has  its  rights  as  well  as  the 
future.  Sacrifices  should  be  reasonably 
averaged.  An  annual  sinking  fund  of 
5  per  cent,  would  extinguish  the  war  debt 
in  fifteen  years. 

5.  Democratic    England    under    two 
Prime  Ministers  belonging  to  the  Liberal 
party  has  shown  how  huge  amounts  of 

37 


SOME        COMMENTS 

increased  revenue — much  greater  rela- 
tively and  greater  even  absolutely  than 
are  required  in  this  country  during  the 
first  year  of  the  war — can  be  obtained  by 
taxation  without  undue  dislocation  of  the 
existing  economic  structure  and  without 
banefully  affecting  the  country's  pros- 
perity. While  it  would  not  do  for  us  to 
follow  the  English  method  of  taxation  in 
all  respects,  it  would  seem  the  part  of 
wisdom  for  us  to  profit  from  her  success- 
ful experience.  And  I  hope  it  will  not  be 
deemed  presumptuous  if  I  venture  to  sug- 
gest that  it  might  not  be  amiss  for  our 
Government  in  this  connection  to  permit 
to  the  practical  experience  and  judgment 
of  business  men  some  recognized  scope  in 
the  deliberations,  as  I  understand  was 
freely  done  in  England.  I  am  entirely 
certain  that  the  spokesmen  for  the  busi- 
ness community  would  give  their  time, 
their  best  thought  and  their  disinterested 

38 


ON        WAR        TAXATION 

service  to  the  task  of  co-operating  in 
devising  a  wise  and  fair  scheme  of  taxa- 
tion as  fully,  readily  and  patriotically  as 
they  have  done  and  are  doing  to  the  task 
of  placing  the  Liberty  Loan. 

6.  In  determining  upon  the  scheme  and 
detail  of  taxation,  it  should  be  borne  in 
mind  that  the  intent  of  the  proceedings  is 
not  punitive,  neither  is  it  to  apply  prac- 
tical Socialism  under  the  guise  of  war 
finance. 

Taxation  is  a  problem  in  mathematics 
and  national  economics.  It  cannot  be 
tackled  successfully  by  hit  or  miss 
methods,  or  upon  the  impulse  of  the 
moment.  It  needs  to  be  approached  "sine 
ira  et  studio"  if  the  best  results  are  to  be 
obtained  for  the  country  at  large. 

Congress  and  public  opinion  might  well 
ponder  the  advice  recently  cabled  here  by 

39 


SOME    COMMENTS 

one  of  the  leading  financial  writers  in 
England:  "You  should  go  slow  in  your 
tax  plans.  Too  violent  a  financial  dis- 
location would  be  caused,  unless  taxation 
is  most  judiciously  and  scientifically 
apportioned." 

The  desire  to  place  the  financial  burden 
incident  to  war  preponderantly  upon  the 
wealthy  is  just  and  right,  but  even  in 
doing  things  from  entirely  praiseworthy 
motives,  it  is  well  to  remember  the  old 
French  saying,  that  virtue  is  apt  to  be 
more  dangerous  than  vice,  because  it  is 
not  subject  to  the  restraint  of  conscience. 


Since  this  article  was  published,  I  have 
received  several  letters  stating  that, 
owing  to  the  excessively  high  cost  of 
living  and  for  other  reasons,  men  of  small 
means  could  not  afford  and  should  not  be 
asked  to  bear  additional  taxation  to  any 

40 


ON        WAR       TAXATION 

appreciable  extent  and  that  therefore  the 
proposed  vast  increase  in  the  income  tax 
is  a  necessity. 

I  fully  agree  with  the  premise,  but  not 
with  the  conclusion.  Economics  are 
stubborn  things  and  cannot  be  success- 
fully dealt  with  emotionally.  I  yield  to 
no  one  in  my  sympathy  for  those  who 
have  to  struggle  to  make  both  ends  meet 
and  in  my  desire  to  see  their  difficulties 
lightened.  I  quite  agree  that  the  financial 
burden  of  the  war  should  be  made  to 
weigh  as  little  as  possible  upon  the  shoul- 
ders of  the  poor  and  those  of  small  means. 
Will  a  two-cent  tax  on  checks  be  a  burden 
upon  the  poor  and  those  of  small  means? 
Will  a  five-cent  tax  on  single  purchases 
(excepting  foodstuffs)  of  $5?  Will  an 
excess-profit  tax  on  the  lines  which  I 
propose?  The  list  of  similar  queries 
could  easily  be  continued. 

The  present  cost  of  living  is  undoubtedly 

41 


SOME    COMMENTS 

alarmingly  high.  I  believe  this  condition 
of  affairs,  to  a  certain  extent  at  least, 
could  be  alleviated  by  appropriate 
measures  and  that  every  effort  should  be 
made  to  that  end.  But  a  huge  increase 
in  the  income  tax  and  unwise  business 
taxation  will  not  accomplish  this.  It 
will,  in  fact,  rather  accomplish  the 
opposite,  apart  from  lessening  employ- 
ment. 


42 


LETTERS 

I 

The  Income  Tax 

Dear  Sir: 

I  fully  agree  with  you  in  the  principle  of 
your  conceptions  of  the  duties  of  moneyed 
men  towards  the  country.  They  must  be 
willing  not  only  to  surrender  such  part  of 
their  income,  indeed  of  their  fortune, 
as  the  necessities  of  the  country  require, 
they  must  be  ready  not  only  to  relin- 
quish their  affairs  and  to  put  their 
time,  their  energies,  capacities  and  expe- 
rience at  the  disposal  of  the  Government 
in  time  of  war,  but  they  must  be 
prepared  to  offer  their  very  lives  if  the 
country  calls  for  them.  Those  are  the 
duties,  of  course,  of  every  citizen,  but 
they  are  doubly  the  duties  of  those  who 

43 


THE        INCOME        TAX 

have  won  success.  I  am  firmly  con- 
vinced that  capitalists  as  a  class  will  not 
fail  in  them  during  the  war. 

My  article  on  war  taxation  was  not 
written  with  any  idea  of  questioning  these 
manifest  and  uncontrovertible  truths, 
but  solely  with  the  purpose  of  contribut- 
ing to  the  discussion  of  the  taxation 
proposals  certain  considerations  which 
I  believe  to  be  well  founded  in  economics 
and  history  no  less  than  in  experience 
and  reason,  and  the  disregard  of  which 
would  be  apt,  I  think,  to  lead  to  con- 
sequences gravely  detrimental  to  the 
commonwealth. 

The  question  to  which  my  article 
addressed  itself  was  not  what  sacrifices 
capital  should  and  would  be  willing  to 
bear  if  called  upon,  but  what  taxes  it  was 
fair,  reasonable  and,  above  all,  to  the 
public  advantage  to  impose  on  capital, 
seeing  that  there  is  a  point  at  which  the 

44 


THE        INCOME        TAX 

country's  economic  equilibrium  would 
be  thrown  out  of  gear  and  at  which  the 
incentive  to  use  capital  constructively 
and  productively  and  to  take  those  busi- 
ness risks  which  are  incident  to  all 
business  activity,  would  be  killed. 

I  greatly  regret  if  what  I  said  on  the 
subject  of  Canada  being  free  from  income 
tax  gave  the  impression  of  being  a 
suggestion  for  the  evasion  by  wealthy 
men  of  taxation  during  the  war.  The 
fact  that  capital  is  not  subject  to  income 
tax  in  Canada  was,  of  course,  well  known 
to  men  of  wealth.  I  thought  it  a  point 
and  a  fact  of  sufficient  importance  as 
bearing  upon  our  own  taxation  program 
to  deserve  to  be  made  generally  known. 
That  this  might  be  considered  as  either  a 
suggestion  or  a  threat  of  what  capital 
might  do  during  the  war,  never,  I  confess, 
entered  my  mind,  for  it  would,  of  course, 
be  little  short  of  treason  for  capital  and 

45 


THE        INCOME        TAX 

capitalists  to  take  advantage  of  Canada's 
propinquity  while  the  war  is  on. 

You  speak  of  the  possibility  of  legis- 
lation to  prevent  this.  If  capital  meant 
to  leave  the  country  to  evade  taxation, 
there  would  have  been  ample  time  and 
opportunity  for  it  to  do  so  during  the 
past  six  weeks.  The  price  of  exchange 
would  indicate  if  that  had  been  done  to 
any  appreciable  extent,  and  proves,  as  a 
matter  of  fact,  that  it  is  not  being  done. 
If  it  were  being  done,  I  quite  agree  with 
you  that  legislation  should  be  sought  to 
prevent  it  and  to  punish  the  attempt. 
But  I  am  entirely  certain  that  moneyed 
men  will  not  think  of  evading  whatever 
sacrifice  may  be  required  of  them  by 
their  country  under  war  conditions. 

What  I  meant  to  intimate  in  saying 
that  capital  and  men  of  enterprise  would 
seek  Canada  if  there  was  no  income  tax, 
or  only  a  moderate  one,  in  that  country, 

46 


THE        INCOME         TAX 

whilst  America  at  this  time  imposed 
excessive  and  practically  punitive  income 
taxation,  was  this: 

Capital  has  a  long  memory.  Capital  is 
proverbially  timid.  I  am  not  referring 
only  to  large  aggregations  of  capital  but 
to  all  capital.  I  am  not  referring  only  to 
the  capital  and  capitalists  of  to-day,  but 
to  those  who  accumulate  capital  by 
practising  thrift  and  to  those  who  by 
invention,  by  conspicuous  organizing  or 
other  ability,  by  originality  of  method, 
etc.,  are  instruments  in  the  creation  of 
capital  and  will  be,  presumably,  amongst 
the  future  owners  of  capital. 

The  possessors  of  capital,  present  and 
future,  would  not  easily  forget  if,  in  the 
very  first  year  of  the  war  capital  in  this 
country  were  to  be  taxed  at  far  higher 
rates  than  prevail  in  any  European  coun- 
try after  three  years  of  war.  Even  if  such 
extraordinary  taxation  was  removed  at 

47 


THE        INCOME        TAX 

once,  after  the  termination  of  the  war, 
capital  would  remain  disquieted  by  the 
fear  that  the  machinery  of  excessively 
high  income  taxation,  once  used  and 
found  easy  of  motion,  might  be  used 
again  for  purposes  of  a  less  serious 
emergency  than  now  exists.  Those  seek- 
ing capital  for  other  countries — and  there 
is  bound  to  be  a  very  keen  contest  for 
capital  after  the  war — would  not  fail  to 
make  use  of  these  arguments.  Moreover, 
experience  has  proved  that  very  high 
rates  of  income  taxation  once  adopted, 
are  not  easily  reduced  to  the  level  from 
which  they  started. 

Therefore,  in  the  case  to  which  my 
argument  was  addressed,  i.  e.9  unduly 
high  income  taxation  in  this  country  and 
no,  or  only  very  moderate,  income  taxa- 
tion in  Canada,  there  can  be  little  doubt 
that  after  the  war  there  would  be  an 
outflow  of  capital  to  Canada,  and  that — 

48 


THE        INCOME         TAX 

which  is  still  more  important — men  of 
enterprise,  especially  young  men,  will  be 
apt  to  seek  in  that  and  other  countries, 
fields  for  their  activities  if  the  reward  of 
enterprise  is  too  greatly  diminished  in 
America  as  compared  to  what  it  is  else- 
where. Such  men  would  be  doing  noth- 
ing else  than  what  many  thousands  of 
American-born  farmers  have  done  within 
recent  years  in  transferring  themselves, 
their  capital  and  their  working  capacity 
to  Canada. 

Not  a  single  one  of  the  leading  European 
nations,  after  three  years  of  the  most 
exhausting  war,  has  an  income  taxation 
schedule  as  high  as  that  adopted  by  the 
House  of  Representatives;  neither  Repub- 
lican France,  nor  Democratic  England,  nor 
Autocratic  Germany.  Of  these  three  coun- 
tries, England  has  imposed  the  highest 
income  taxation;  yet,  the  maximum  rate 
in  England  is  almost  fifty  per  cent,  less 

49 


THE        INCOME         TAX 

than  the  maximum  rate  in  the  House 
Bill.  The  Cabinets  in  these  countries 
have  undergone  many  changes  in  the  course 
of  the  war.  They  include  Socialists  and 
Representatives  of  Labor.  In  the  deter- 
mination of  their  taxation  program,  they 
have  had  the  assistance  of  the  best 
economic  brains  in  Europe.  Those  na- 
tions have  had  far  longer  experience  than 
we  in  the  science  of  government  financing. 

Yet  not  one  of  them  has  deemed  it 
wise  and  advantageous  to  the  state  to 
impose  rates  of  income  taxation  as  high 
as  those  fixed  by  the  House  of  Repre- 
sentatives. Surely,  this  fact  and  the 
economic  considerations  underlying  it, 
are  deserving  to  be  seriously  weighed  by 
our  legislators. 

Does  not  the  attitude  of  all  the  leading 
countries  plainly  indicate  their  recogni- 
tion of  the  fact  that  the  action  and  reac- 
tion of  excessive  income  taxation  create 

50 


THE        INCOME        TAX 

a  vicious  circle  from  which  the  govern- 
ments of  all  belligerent  nations  even  in 
their  extremity  have  shrunk? 

And  is  it  not  a  manifest  dictate  of  rea- 
son that  such  burden  of  taxation  as  must 
be  borne  should  be  imposed  gradually,  as 
was  in  fact  done  everywhere  in  Europe,  so 
as  to  give  to  all  concerned  a  chance  to 
adjust  themselves  to  the  new  conditions, 
and  not  with  one  violent  jerk?  England 
imposed  her  present  rate  of  income  and 
excess  profit  taxes  not  in  the  first  year  of 
the  war,  but  started  on  a  much  lower 
scale  and  by  successive  steps,  in  the  course 
of  nearly  three  years,  attained  the  figures 
now  prevailing. 

We  know  that  man  and  beast  are  cap- 
able of  carrying  far  heavier  weights  if  the 
strain  is  gradually  increased  than  if  the 
whole  of  the  burden  is  dumped  on  their 
backs  at  once.  The  same  holds  good  of 
economic  strain. 

51 


THE        INCOME        TAX 

Is  it  not  plain  that  if  the  unprece- 
dentedly  high  income  taxation  of  the 
House  Bill — exceeding  as  it  does  any 
rates  ever  imposed  by  any  of  the  leading 
nations  of  the  world — is  enacted  into  law, 
the  Government  will  find  itself  crippled 
in  respect  of  taxable  resources  during  the 
second  year  of  the  war;  the  very  year 
which,  if  the  war  does  last  beyond  the 
present  one,  will  presumably  be  the 
crucial  period. 

Of  course,  the  cost  of  the  war  must  be 
laid  according  to  the  capacity  to  bear  it. 
It  would  be  fatuous  folly  and  crass  sel- 
fishness to  wish  it  laid  or  endeavor  to 
have  it  laid  otherwise.  All  I  am  advocat- 
ing in  effect  is  that  in  the  public  interest 
not  too  much  be  exacted  at  once,  but 
that  by  dividing  the  burden  over  a  rea- 
sonable number  of  years,  capital  in  no 
one  year  and  especially  not  during  the 
first  year  of  the  war,  should  be  so  exces- 

52 


THE        INCOME        TAX 

sively  taxed  as  to  produce  an  unscientific 
and  dangerous  strain. 

In  addition  to  the  concrete  factors, 
there  enter  into  this  question  certain 
psychological  elements  of  a  somewhat 
subtle  character,  but  sufficiently  definite 
and  potent  to  be  plainly  discernible  to 
those  who  are  experienced  in  dealing  with 
business  affairs  and  with  men  of  business, 
large  and  small. 

I  believe  an  income  tax  greatly  in- 
creased over  the  rates  heretofore  prevail- 
ing, yet  keeping  within  the  bounds  of 
moderation,  would  produce  at  least  as 
large  a  total  revenue  as  an  exceedingly 
high  one.  And  the  consequences  of  the 
economic  error  of  placing  too  vast  a  bur- 
den direct  upon  incomes  would  be  more 
serious,  I  think,  to  the  people  in  general 
than  to  the  individuals  directly  con- 
cerned. The  question  of  the  individual  is 
not  the  principal  one.  The  essential 

53 


THE        INCOME        TAX 

thing  is  that  no  undue  strain  be  placed 
upon  that  great  fund  of  capital  as  a 
whole  which  is  derived  from  incomes  of  all 
kinds.  It  is  this  fund  which  in  its  turn  is 
one  of  the  vital  forces  necessary  for  the 
normal  activities  and  progress  of  industry. 
If  that  fund  is  suddenly  and  too  greatly 
reduced,  the  effect  upon  commerce  and 
industry  is  liable  to  be  abrupt  and 
withering. 

I  yield  to  no  one  in  my  desire  to  see  the 
burden  upon  the  poor  and  those  of  mod- 
erate means  lightened  to  the  utmost 
extent  possible. 

I  realize  but  too  well  that  the  load 
weighing  at  this  time  upon  wage  earners 
and  still  more  perhaps  upon  men  and 
women  with  moderate  salaries  is  almost 
too  great  to  be  borne  and  certainly  much 
greater  than  it  should  be.  I  wish  a  com- 
mission might  be  appointed,  consisting  of 
those  best  qualified  in  the  entire  country, 

54 


THE        INCOME        TAX 

to  apply  themselves  to  this  most  serious, 
difficult  and  complex  problem,  indeed  to 
the  entire  problem  of  excessively  high 
prices.  I  hope  they  would  discover 
means,  if  not  to  remedy  the  situation 
entirely,  at  least  to  alleviate  it. 

But  I  am  convinced  that  relief  cannot 
be  found  in  taxation  of  incomes  at  rates 
without  a  parallel  anywhere,  and  in 
unduly  burdensome  imposts  upon  busi- 
ness activities.  I  am  convinced  that  cer- 
tain theories  being  urged  upon  Congress 
and  the  people  and  to  which  the  House 
War  Revenue  measure  is  in  part  respon- 
sive, while  doubtless  meant  to  tend  and 
seemingly  tending  to  a  desirable  con- 
summation, are  in  fact  bound,  in  their 
longer  effect,  to  bring  about  results  harm- 
ful to  the  community  at  large,  rich  and 
poor  alike. 

It  is  only  that  conviction  which  has 
emboldened  me  to  state  my  views  pub- 

55 


THE        INCOME        TAX 

licly.  In  doing  so  I  fully  realized  that  I 
was  running  the  risk  of  having  my  action 
misunderstood  or  misconstrued,  and  to  be 
charged  with  selfishness  and  lack  of 
patriotism. 

Yet,  I  feel  certain  that  in  the  end  just 
recognition  of  their  motives  will  not  be 
withheld  from  those  who,  in  defiance  of 
the  fleeting  popularity  of  the  plausible, 
venture  to  point  out  the  dangers  of  im- 
petuous action,  however  well  intentioned, 
in  the  present  emergency,  and  to  urge 
that  moderation  and  that  regard  for  the 
lessons  of  history  and  of  economics  which 
can  be  left  aside  only  at  the  peril  of  the 
general  welfare. 

Very  faithfully  yours, 

(Signed)  OTTO  H.  KAHN 

P.  S. — That  you  or  any  one  else  should 
even  for  a  moment  attach  credence  to  the 
monstrous  suggestion  that  capitalists 

56 


THE        INCOME        TAX 

fomented  America's  entrance  into  the  war 
because  they  feared  that  otherwise  the 
amounts  loaned  by  them  to  the  Allies 
might  be  jeopardized  or  lost,  is  a  truly 
distressing  manifestation  of  the  willing- 
ness of  some  of  our  people — I  trust  not 
many — to  believe  evil  of  men  simply  be- 
cause they  have  been  materially  successful. 

Leaving  aside  the  cruel  injustice  of  such 
an  imputation,  it  attributes  to  moneyed 
men  a  degree  of  stupidity  and  of  ignorance 
as  to  their  own  interests,  of  which  they 
are  not  usually  held  guilty. 

America  loaned  to  the  Allied  nations, 
prior  to  our  entrance  into  the  war, 
roughly  speaking,  $2,000,000,000,  of 
which  sum  all  but  a  small  fraction  was 
loaned  to  England  and  France. 

These  loans  were  made  almost  entirely 
in  the  shape  of  bond  issues  which  were 
widely  distributed  amongst  individuals 
and  institutions  throughout  this  country. 

57 


THE        INCOME        TAX 

Therefore,  no  very  large  portion  of  the 
aggregate  is  in  the  hands  of  any  one  per- 
son or  institution. 

To  any  one  acquainted  with  financial 
affairs  it  is  absolutely  inconceivable  that 
England  or  France  would  have  defaulted 
on  the  relatively  moderate  amount  of 
their  foreign  debt,  whatever  might  have 
been  the  outcome  of  the  war,  if  America 
had  not  joined. 

Let  us  grant,  for  argument's  sake,  the 
wildly  far-fetched  supposition  that  in  one 
way  or  another  their  internal  debt  might 
have  become  affected;  it  would  still  be 
utterly  inconceivable  that  they  would 
have  permitted  a  default  in  their  foreign 
debt,  because  it  is,  of  course,  suicidal  for 
any  nation  to  jeopardize  its  world  credit. 

But  let  us  go  still  a  step  further  and 
assume,  in  defiance  of  all  reason,  that  even 
this  totally  inconceivable  thing  were  to 
have  happened.  It  would  have  meant,  of 

58 


THE        INCOME         TAX 

course,  not  a  total  and  irrecoverable  loss 
to  the  holders  of  obligations  of  the  Allied 
countries,  but  merely  a  more  or  less 
temporary  shrinkage  of  the  value  of  such 
holdings. 

A  single  year's  war  taxation  will  take 
out  of  the  pockets  of  capitalists  a  great  deal 
more  than  they  could  possibly  have  lost 
through  depreciation  in  value  of  such 
amount  of  Allied  bonds  or  loans  as  they 
may  hold. 

If  you  add  to  these  considerations  the 
circumstance  that,  owing  to  the  interven- 
tion of  our  Government  in  financing  and 
otherwise  providing  for  the  Allies,  the 
commissions  and  profits  of  those  who  have 
heretofore  dealt  with  the  Allies  will  be 
largely  cut  off;  that  business  will,  quite 
rightly,  be  subjected  to  a  large  excess 
profits  tax;  that  capital  for  years  to 
come  will  have  to  pay  increased  taxes  to 
provide  for  the  debt  incurred  through  the 

59 


THE        INCOME        TAX 

war,  for  pensions,  etc. ;  if  you  will  reflect 
on  these  and  various  other  patent  consid- 
erations, you  will  realize  that  any  rich 
man,  fomenting  for  selfish  reasons  our 
entrance  into  the  war,  would  be  a  fit 
subject  for  the  immediate  appointment 
of  a  guardian  to  take  care  of  him  and  of 
his  affairs. 


60 


TAX-EXEMPT      SECURITIES 


n 

The  Actual  Return  Upon  Taxable 
and  Tax-Exempt  Securities 

Dear  Sir: 

Your  letter  indicates  that  you  do  not 
sufficiently  realize  the  enormous  advan- 
tage in  interest  yield  which  under  the 
income  tax  schedule  as  fixed  in  the  House 
Bill  is  possessed  by  tax-exempt  securities 
as  compared  to  taxable  securities,  espe- 
cially, of  course,  in  respect  of  large 
incomes. 

Permit  me  to  call  your  attention  to  the 
following  eloquent  facts: 

The  yield  of  tax-exempt  securities  at 

prevailing  prices  ranges  from  3J^%  to 

nearly  4^%.      Under  the  rates  fixed  in 

the   War   Revenue  Bill  as   it  passed  the 

61 


THE    RETURN     ON     TAXABLE 

House  of  Representatives,  a  taxable  6% 
investment  would  yield : 


PER  ANNUM 


2.28%  on  incomes  over  $2,000,000 

2.34%  "  "  "  1,500,000 

2.40%  "  "  "  1,000,000 

2.69%  "  "  "  500,000 

2.97%  "  "  "  300,000 

3.26%  "  "  "  250,000 

3.54%  "  "  "  200,000 

3.90%  "  "  "  150,000 

4.20%  "  "  "  100,000 

Or,  to  put  it  in  another  way,  the  invest- 
ment in  3^%  "Liberty  Bonds"  is  thus 
equivalent  to  investing  in  a  taxable  se- 
curity yielding: 

PER  ANNUM 

9.21%  in  respect  of  incomes  over  $2,000,000 

8.97%  "  "  "  "  "  1,500,000 

8.75%  "  "  "  "  "  1,000,000 

7.82%  "  "  "  "  "  500,000 

7.07%  "  "  "  "  "  300,000 

6.45%  "  "  "  "  "  250,000 

5.93%  "  "  "  "  "  200,000 

5.38%  "  "  "  "  "  150,000 

5.02%  "  "  "  "  "  100,000 

62 


AND   TAX-EXEMPT  SECURITIES 

The  investment  in,  say,  New  York  City 
Bonds,  being  tax-exempt,  at  their  present 
yield  of  4.20%,  would  represent  the  fol- 
lowing rates  of  income  as  compared  to 
investments  in  taxable  securities: 

PER  ANNUM 

11.05%  in  respect  of  incomes  over  $2,000,000 

10.76%"  "  "  "  "  1,500,000 

10.50%"  "  "  "  "  1,000,000 

9.38%  "  "  "  "  "  500,000 

8.48%  "  "  "  "  "  300,000 

7.74%  "  "  "  "  "  250,000 

7.12%  "  "  "  "  "  200,000 

6.46%  "  "  "  "  "  150,000 

6.02%  "  "  "  "  "  100,000 

Of  course,  all  these  figures  hold  good 
only  for  the  period  during  which  the  pro- 
posed rates  of  income  taxation  would  pre- 
vail. As  the  income  tax  rate  decreases, 
the  yield  from  tax-exempt  securities 
diminishes  proportionately. 

The  volume  of  tax-exempt  securities  at 
present  outstanding,  including  the  new 

63 


THE    RETURN    ON     TAXABLE 

"Liberty  Loan,"  is  estimated  at  not  less 
than  $8,000,000,000. 

The  ability  of  corporations  to  find  a 
ready  market  for  their  securities  is  a  pre- 
requisite for  the  continuance  of  business 
prosperity  or,  indeed,  of  adequate  busi- 
ness activity.  I  need  not  elaborate  the 
effect  which  the  comparison  of  the  in- 
come yield  from  tax-exempt  securities  as 
against  taxable  securities  under  an  exces- 
sively high  income  tax  schedule — even  if 
confined  to  larger  incomes — must  neces- 
sarily have  upon  the  eligibility  of  cor- 
porate securities  for  investment  purposes. 
The  conclusion  seems  unescapable  that 
the  resulting  degree  of  disinclination  to 
invest  in  such  securities  coupled  with  the 
impulse  to  dispose  of  existing  holdings 
would  bring  about  liquidation,  severe 
shrinkage  of  values  and  more  or  less  pro- 
nounced demoralization  in  the  investment 
market — a  condition  of  things  which  could 

64 


AND   TAX-EXEMPT  SECURITIES 

not  fail  in  a  measure  to  affect  adversely 
the  country's  business  in  general,  and 
which  could  only  partially  be  counter- 
acted by  Government  expenditures,  how- 
ever large. 

As  to  your  observations  concerning  the 
principle  of  tax-exempt  issues,  I  believe 
the  Government  acted  wisely,  considering 
all  the  elements  of  the  situation,  in  making 
its  first  great  war  issue,  the  Liberty  Loan, 
tax  free.  But  in  the  face  of  the  figures 
above  quoted,  the  question  naturally 
presents  itself  whether  our  traditional 
policy  of  making  Government  issues 
tax-exempt  should  not  be  discontinued, 
which,  of  course,  would  mean  that  a 
materially  higher  rate  of  interest  than 
3//2%  would  have  to  be  paid  for  Govern- 
ment borrowing. 

In  theory,  it  seems  to  me,  there  can  be 
little  doubt  that  the  balance  of  arguments 
is  against  the  tax-exemption  of  Govern- 

65 


THE    RETURN    ON     TAXABLE 

ment  loans.  As  an  abstract  proposition 
little  can  be  said,  I  think,  in  favor  of  a 
policy  the  effect  of  which  gives  an 
advantage  to  the  rich  and  well-to-do, 
militates  against  the  widest  possible  dis- 
tribution of  Government  issues  amongst 
the  people,  tends  to  facilitate  Govern- 
mental extravagance  by  concealing  the 
true  cost  and  establishes  a  fictitious  basis 
of  national  credit. 

Thus,  for  instance,  on  the  $1,000,000,- 
000,  or  thereabouts,  which  our  Govern- 
ment has  loaned  to  the  Allies  at  3J^% 
interest,  it  is  losing  money,  because, 
whilst  it  nominally  borrows  this  money 
through  the  Liberty  Loan  at  3j^%,  the 
cost  to  it  is  actually  considerably  higher 
because  it  loses  the  revenue  which  would 
accrue  to  it  from  the  income  tax  if  the 
bonds  were  not  tax-exempt. 

Let  me  add  that  I  do  not  wish  to  be 
understood  as  suggesting  that  our  Govern- 

66 


AND  TAX-EXEMPT  SECURITIES 

ment  should  charge  to  the  Allied  Nations 
more  than  the  nominal  rate  at  which  it 
is  borrowing.  They  have  been  fighting 
these  three  years  and  bringing  unheard 
of  sacrifices  for  a  cause  which  we  have 
recognized  to  be  ours  no  less  than  theirs, 
and  if  we  loan  them  money  somewhat 
below  its  actual  cost  to  us  that  item 
weighs  but  very  lightly  in  the  scale, 
especially  also  if  we  consider  the  immense 
monetary  profits  which  our  country  has 
reaped  from  the  sale  to  them  of  muni- 
tions, material  and  supplies. 

However,  as  against  the  theoretical 
objections,  some  of  which  I  have  men- 
tioned, to  the  tax-exemption  of  Govern- 
ment loans,  there  are  certain  "impon- 
derabilia" — things  which  cannot  be  ex- 
actly weighed — in  favor  of  a  low  rate  of 
interest  for  Government  borrowing,  even 
if  the  lowness  of  the  rate  is  to  an  extent 
fictitious.  There  are  also  certain  practical 

67 


THE     RETURN    ON    TAXABLE 

reasons  for  the  maintenance  of  our  tradi- 
tional policy,  and  various  concrete  facts 
which  must  be  taken  into  account.  For 
instance,  there  is  the  problem  of  how  to 
deal  with  the  situation  that  might  result 
from  the  withdrawal  of  deposits  from 
savings  banks  and  similar  institutions, 
which  probably  would  be  liable  to  occur 
in  case  the  Government  offered  a  bond 
issue  at  the  higher  rate  it  would  have  to 
fix  if  the  inducement  of  tax-exemption 
were  removed. 

There  is  the  problem  of  the  existence  of 
billions  of  municipal  and  state  securities 
which  offer  to  the  holder  the  privilege  of 
freedom  from  municipal,  state  and  Fed- 
eral taxes.  I  understand  that  it  is  the 
consensus  of  opinion  of  our  leading 
lawyers  that  under  the  legal  theory  which 
treats  such  issues  as  "instrumentalities  of 
government"  that  privilege  cannot  be 
abridged  and  that  Congress  has  no  con- 

68 


AND   TAX-EXEMPT  SECURITIES 

stitutional  power  to  tax  state  and 
municipal  issues. 

If  state  and  municipal  issues  to  be 
made  during  war  time  retain  the  feature 
of  being  free  from  taxation,  can  the 
Federal  Government  afford  to  make  its 
war  loans  taxable,  and  thereby  place 
itself  in  a  position  where  it  would  have  to 
borrow  under  conditions  which  would 
put  it  and  its  credit  at  a  disadvantage  as 
compared  to  state  and  municipal  issues? 

The  problem  is  a  complex  one  altogether 
and,  like  all  economic  questions,  requires 
to  be  approached  in  a  dispassionate 
spirit,  giving  due  consideration  to  the 
reasons  for  and  against.  The  temper  of 
the  stump  speaker  is  not  appropriate  for 
dealing  with  taxation  problems. 

Let  me  add,  in  conclusion,  that  I  fully 
agree  that  it  is  "sheer  fiscal  stupidity" 
and  "socially  inexpedient  as  well"  to  per- 
mit "mushroom  fortunes"  to  be  built  out 

69 


THE     RETURN    ON    TAXABLE 

of  war  profits.  I  believe  there  ought  to 
be  imposed  a  large  excess  war  profits  tax  on 
the  English  model  upon  a  fair  and  well 
conceived  average  basis  of  earnings  so 
calculated  as  to  take  account  of  the  vast 
difference  in  the  country's  industrial 
plant  to-day  and  before  the  European 
war.  Such  a  tax  may  not  be  entirely 
free  from  objections  in  theory,  but  from 
the  social  and  moral  point  of  view  it  is, 
I  am  convinced,  thoroughly  sound  and 
proper  and  called  for.  Appropriate  taxa- 
tion of  excess  profits,  together  with  an 
adequately  though  not  exorbitantly  heavy 
income  tax  would  go  a  long  way  to  pre- 
vent the  enrichment  of  a  class  through  the 
calamity  of  war,  without  at  the  same 
time  affecting  wages  or  laming  the  enter- 
prise and  business  activities  of  the 
country. 

Yours  very  truly, 

(Signed)  OTTO  H.  KAHN 

70 


Gayiord  Bros. 

Makers 

Syracuse.  N.  Y. 
PAT  JML  21.  BK 


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